Money Market vs CD: What You Need To Know

Brian Roberts

Article Approved By Banking Expert

This article has been reviewed and deemed factual by our content auditor with 8 years of banking experience.

Article Approved By Banking Expert

This article has been reviewed and deemed factual by our content auditor with 8 years of banking experience.

Earning a hefty return on your savings is essential for building wealth.

And knowing the differences between a money market vs CD plays a part in that.

But inflation causes money to lose value every year.

So you have to get returns equivalent to at least the prevailing rate of inflation to avoid losses.

When you’re able to earn significant interest, you can watch your money grow with each passing year.

And both money market accounts and certificates of deposit–or CDs–are some of the most accessible investments.

Millions of people use these to earn interest on their savings. But these accounts have significant differences. And they’re both long-term investments (here’s our list of the best short term investments). So, you should ensure that you understand them thoroughly before making an investment. Once you understand money market vs CD accounts, you can use them to gradually build wealth.

What Is A Money Market Account?

Money market accounts enable you to earn interest at the prevailing rate in the financial markets. It all starts with your deposit. Once you make a deposit, it gets leveraged. Your bank accepts liability for any losses.

Money Market Requirements

As a depositor, you will earn relatively stable interest from the money that you invest. Money market accounts are flexible. Since your funds can be released in as little as one day if you are investing in overnight accounts.

Money market accounts are flexible and withdrawing is fast.

Most money market accounts enable you to make instantaneous withdraws. This is done by moving money from your money market account to a savings.

Money Market Account Withdrawing

Instead of waiting for trades to close, banks move funds from revolving cash pools for withdrawals. Consequently, many banks give depositors checks and debit cards attached to money market accounts. This is so that you can access your funds immediately.

Regulations limit money market account withdraws to 6 monthly.

Money market accounts are highly liquid. But banks are not allowed to let you use them as ordinary checking accounts. Because Regulation D limits banks to letting you make six withdrawals per calendar month with a money market account.

You also cannot carry unused withdrawal credits into future months. And, if you regularly go over the limit, your bank will have no choice but to close your account.

Money Market Returns

You should expect money market returns to exceed returns a saving accounts by a wide margin. Interest rates have historically been much higher with money market accounts. But, unfortunately, today’s low-interest environment has made the returns only slightly higher versus a savings.

However, if you’re able to make a substantial deposit, banks will give you prime rates. Especially when you shop around. And, as interest rates begin to normalize, returns from money market accounts are likely to rise with them.

Money market accounts are insured by the FDIC.

Overall, money market accounts are a great way to save money because of their high flexibility. Another benefit is that money market accounts are insured by the FDIC. Another plus is, as long as your balance doesn’t go below any required minimums, you can continue to move funds in and out of your account with few restrictions. As per Ally Bank on the benefits of MMAs:

Your money market account can be opened and funded with any amount. And there are no monthly maintenance fees or minimum balance requirements. Plus, Ally doesn’t charge fees to use ATMs nationwide. And, if you are charged ATM fees by other banks in the U.S., we’ll automatically reimburse you at the end of your monthly statement period.

While PNC Bank offers just 0.03% APY (and Citibank offers just 0.20% APY) the folks at Ally offer 1% for balances over $25,000.

What Is A CD?

CDs are investments that enable you to earn extra interest by agreeing to keep your money in the bank for a fixed period of time. Banks are required to have a certain amount of money on deposit that is guaranteed to remain available in the near term.

CD Requirements

The specific deposit requirements are set by the Federal Reserve and vary over time, but what is significant to consumers is that demand for CDs varies widely between banks.

If banks get too close to the required deposit limit, they sometimes have to drastically increase their CD rates to acquire the necessary funds. You can, therefore, often find outstanding rates on CDs if you conduct sufficient research.

Some 2019 CD rates are as high as 4.0% based on our research.

In recent years, monetary easing has given banks less of an incentive to attract customers with CD products. But banks are starting to revert to policies where CDs were offered at rates greater than an ordinary savings.

CD Rates

CD rates increase substantially as the term of a contract is extended over a longer period of time. You can get CDs for a term of as little as one month, but most consumers choose to invest in CDs that mature over a period of 2 to 5 years.

CD rates are often higher the longer the maturation period.

Monthly or quarterly CDs simply offer returns that are too low, and they can be a hassle to manage when you have to continually buy them again. CDs are insured because they treated as ordinary bank deposits.

CD Withdrawing

Although you do not get to enjoy the flexibility of having access to your money at any time, you still reap the benefits of the same protections that consumers ordinarily receive with standard bank accounts.

CD accounts aren’t as flexible and withdrawing is slower.

Getting your money back at the term of a CD is also very simple since banks simply post the funds to your bank account immediately. You can, then, choose to get another CD if prevailing rates are favorable.

Money Market vs CD Rates

Both CDs and money market accounts offer returns that are substantially higher than with an ordinary savings account. If you are currently using only a savings account and have $1,000 or more, it makes sense in nearly all cases to at least put your savings into the money markets or CDs.

The challenge, however, is deciding which account will offer the highest returns in your situation. Many banks have tiered rates on CDs that vary depending on how much you are willing to deposit. If you have over $50,000 to put into your account, you can expect to get the highest rates that most banks offer.

For prime (unadvertised) rates, have over $50,000 to deposit.

Likewise, some banks advertise that you can get CDs with a relatively low balance of under $1,000, but these accounts sometimes offer trivial interest. When buying CDs, shopping around is crucial because some banks offer rates exceeding 3.5 percent on smaller balances while other banks give huge depositors less than 1 percent interest.

Unlike with CDs, money market rates are similar between banks. For smaller depositors who are loyal to one bank, money market accounts often offer higher rates.

Most banks offer 2%–2.35% interest on money market funds.

However, you have to be very mindful of minimum balances and withdrawal limits since high bank fees for breaching the terms of your contract can wipe out several years worth of interest on smaller accounts. If you do not think that you can budget carefully enough to stay within the terms of your agreement, you may want to consider a CD that forces you to lock away your money.

Money Market vs CD Wrap-Up

The bottom line is that you have to evaluate your own situation to decide whether CDs or money market accounts will offer higher returns. If you have a lot of money to lock away for 2 to 5 years, CDs are probably your best option. With smaller balances, you will need to compare rates and consider your demand for flexibility to decide which investment will help you to reach your financial goals.

Money Market vs CD Risks

The risks associated with CDs and money market accounts are only theoretical. Why? Because returns are guaranteed at several levels. So, even if your bank went belly up, you’d still get your money back. Because CDs and money market accounts are legally treated as ordinary bank accounts.

Most of the risk associated with CD and money market accounts is via breaking bank terms. As an example, medical bills, emergencies, and major life changes can happen unexpectedly. If you’re forced to withdraw money early, CD early withdraw fees can be very high. But fees for withdrawals from money market accounts are lower (or non-existent).

Choosing The Right Account

To decide which type of account to open, first analyze your own situation. Have significant savings? You may be able to afford to lock your money away in a CD. On the other hand, people with volatile finances are usually better off opening a money market account. This is due to flexibility.

Base your decision on your objectives over the next few years. Do this to minimize your chances of incurring a penalty. Take time to decide whether a CD vs money market account will enable you to earn sufficient interest to improve your financial future.